Economists: Burden of huge deficits could be mind-numbing

| Sunday, April 5, 2009

Something's amiss in America when Communist China chides Washington for its fiscal policy, as its premier did in early March. His complaint• Our terrible dragon of deficits, driven by corporate bailouts.

Since the recession began in December 2007, the government has thrown at least $1.1 trillion of taxpayer money at troubled corporations, mostly in the financial services industry. Citigroup alone received at least $50 billion in subsidies, according to Treasury Department figures.

Taxpayers such as Douglas Broglie, a retired school administrator in Upper St. Clair, don't like it. "These bailouts are like blank checks, without government checks and balances," he said. "Once you start to open the gates to help the corporate world, where do you stop?"

Economic experts say the resulting soaring budget deficits threaten to push up interest rates, taxes and inflation, devalue the dollar and divert too much federal money from other pressing priorities to simply pay interest on debt.

The budget deficit this year will likely hit $1.8 trillion, according to the Congressional Budget Office, or CBO, the nonpartisan number cruncher cited by most economists. That equals about $5,900 for each American.

In February 2008, the government responded to the slowdown caused by the housing and credit crisis by enacting a $168 billion "economic stimulus" bill. As the crisis worsened, the government enacted a series of bailouts, including:

• $29 billion in April 2008 to shore up the crippied investment bank Bear Stearns' merger into JPMorgan Chase.

• $200 billion in September to recapitalize mortgage giants Fannie Mae and Freddie Mac.

• $182 billion since September to bail out American International Group, or AIG.

• $700 billion since October to bail out the nation's commercial and investment banks.

• $25 billion to rescue General Motors, Chrysler, their car-financing affiliates and auto parts makers.

"The government should say, when banks need capital, to go raise it in the market," said veteran economist Allan Meltzer. As the Treasury Department formulated the $700 billion bank-rescue plan in late September, he suggested the agency only back-stop banks' capital-raising.

"When I presented that to (former secretary) Paulson and the Treasury, they said the banks don't want to do that," said Meltzer, professor of political economy and public policy at Carnegie Mellon University. "Of course they don't; they want the government to put up all the money."

Two months ago, the nation's debt surged again. President Barack Obama signed an economic stimulus bill Feb. 17 that tacked on $787 billion in federal debt — more than four times bigger than President George W. Bush's economic stimulus bill a year earlier.

This latest plan to juice the economy — the American Recovery and Reinvestment Act of 2009 — is supposed to create 3.5 million new jobs. It provides billions for social programs and infrastructure, and consumer tax credits for college education, new vehicles, energy-efficient windows and the like.

"Obama's idea for growth is to subsidize energy and health care. And maybe that's good, but it isn't growth," Meltzer said.

The economist calls the president's economic plan "ridiculous." He is especially critical of the administration's goal of raising deficits before cutting them to "only $900 billion" by the end of the president's term in 2013.

"The result will be three things: A race between interest rates and inflation and price controls," said the economist. "And all three will win."

On top of the government's nearly $1 trillion for the two stimulus bills since February 2008, comes a mind-numbing government budget. Congress is considering a $3.6 trillion budget proposal for the year beginning next October.

"It's frightening when you look at the numbers they throw around," said Broglie, who is in his early 60s. "My son is 30, and he's going to bear the brunt of this."

Budget deficits usually amount to about 2 percent of gross domestic product, the value of goods and services the nation produces. But the CBO now estimates the deficit will average well over 5 percent for the next 10 years.

"That's just not sustainable," said Norman Robertson, economic adviser at Smithfield Trust, Downtown. "It implies a staggering amount of borrowing that would have to be done, or the government will have to raise taxes substantially."

The government borrows by selling billions in Treasury securities, including to foreign buyers, especially when the United States has bloated debt to service. The argument that America is spending recklessly was brought home by Chinese Premier Win Jiabao. He told reporters last month that given China's billions in Treasuries, his nation had grown "concerned about the safety of our assets."

"China is getting nervous," said Robertson. Surging budget deficits will likely fuel inflation and cheapen the dollar, thus lowering the value of China's and other foreign holders' investments in U.S. debt.

Massive government borrowing crowds out businesses and consumers from the credit markets, the economist said.

"It's more difficult for companies to get credit because the government preempts a significant amount of available credit," which raises interest rates, Robertson said. "So it's a double whammy: It reduces the supply of credit and increases the cost."

Interest rates are not likely to increase for some months because the steep recession has tamped business and consumer borrowing. "But when the economy starts to recover, (rates) will rise," Meltzer said. "Businesses are going to be hurt."

Deficits compromise the government's own efficacy, said Josh Gordon, policy director of The Concord Coalition, a nonpartisan organization formed in the early 1990s by former Sen. Warren Rudman (R-N.H.) and other leaders to combat reckless fiscal policy.

"Running big deficits means government spends substantially more on debt, and there's less money available to do crucial things," Gordon said. "There's less money to invest in things like technology or R&D or education or infrastructure — all the things that lead to greater economic growth."

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